The Nature of the Firm - A social cybernetic analysis.

Abstract

In 1937, Ronald Coase published 'The Nature of the Firm' [1], addressing the question of why firms exist. He concluded that firms emerge to reduce costs of transactions. A 'transaction' is defined both as the action of conducting business, as well as an interaction between people. Both senses of the term prompt the present social cybernetic analysis of the nature of the firm. Social cybernetics focuses upon the reciprocal feedback control and feedforward interactions between two or more individuals in a group or organizational setting, a process termed social tracking. Social cybernetic principles can be used to understand how firms establish and maintain the high levels of transactional efficiency necessary to survive and remain competitive. Selected examples are introduced, and subjected to social cybernetic analysis, of the types of transactions that the manager of a firm is expected to engage in regularly and with a high degree of effectiveness. From the perspective of social cybernetics, the potential for continued market success of a firm is equated with the degree to which the fidelity of social tracking among transactional participants is developed, maintained and refined through organizational design and management.